Applied Welfare Economics, Trade, and Agricultural Policy Analysis

327 Pages·2021·5.287 MB·English

by  G. Cornelis van Kooten

APPLIED WELFARE ECONOMICS, TRADE,
AND AGRICULTURAL POLICY ANALYSIS
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APPLIED
WELFARE
ECONOMICS,
TRADE, AND
AGRICULTURAL
POLICY
ANALYSIS

G. Cornelis van Kooten

University of Toronto Press
Toronto Buffalo London
© University of Toronto Press 2021
Toronto Buffalo London
utorontopress.com
Printed in the USA

ISBN 978-1-4875-0607-0 (cloth) ISBN 978-1-4875-3324-3 (EPUB)
ISBN 978-1-4875-2409-8 (paper) ISBN 978-1-4875-3323-6 (PDF)

Library and Archives Canada Cataloguing in Publication

Title: Applied welfare economics, trade, and agricultural policy analysis / G. Cornelis van Kooten.
Names: Van Kooten, G. C. (Gerrit Cornelis), author.
Description: Includes bibliographical references and index.
Identifiers: Canadiana (print) 20210145684 | Canadiana (ebook) 20210145714 | ISBN 9781487506070
(cloth) | ISBN 9781487524098 (paper) | ISBN 9781487533243 (EPUB) | ISBN 9781487533236 (PDF)
Subjects: LCSH: Agriculture and state. | LCSH: Agriculture – Economic aspects. | LCSH: Welfare
economics. | LCSH: International trade.
Classification: LCC HD1415 .V36 2021 | DDC 338.1—dc23

University of Toronto Press acknowledges the financial assistance to its publishing program of the Canada
Council for the Arts and the Ontario Arts Council, an agency of the Government of Ontario.
CONTENTS
Contents v
List of Tables xi
List of Figures xiii
Acronyms xvii
Acknowledgments xxi

1 Introduction 1
1.1 Setting the Agricultural Stage 2
1.1.1 Top Agricultural Commodity Producers 3
1.1.2 Food Security: Green Revolution and Crop Yields 5
1.2 Structure of the Book 7
Guide to Literature 10
2 Project Evaluation Criteria 12
2.1 Private Financial Analysis 12
2.1.1 Financial Ranking Criteria 13
2.1.2 Conclusion 15
2.2 Society’s Perspective: Social Cost-Benefit Analysis 16
2.2.1 Benefits and Costs as Rent and Surplus 16
2.2.2 The Fundamental Equation of Applied Welfare Economics 20
2.2.3 Total Economic Value 22
2.2.4 Total (Average) Value versus Marginal Value 25
2.2.5 Conclusion 26
2.3 Multiple Accounts and Alternative Criteria 27
2.3.1 Environmental Quality 28
2.3.2 Regional Economic Development and Employment: Indirect Benefits 29
2.3.3 Other Social Effects 31
2.3.4 Concluding Observations about Multiple Accounts 31
2.4 Alternative Methods for Evaluating Projects 32
2.4.1 Cost-Effectiveness Analysis 32
2.4.2 Multiple Criteria Decision-Making 33
2.4.3 Life-Cycle Assessment 34
2.4.4 Cumulative Effects Analysis 35
2.5 Extreme Events and Irreversibility 36
2.6 Discounting and Choice of Discount Rate 38
2.6.1 Dilemmas in Choosing a Discount Rate in Cost-Benefit Analysis (CBA) 38
2.6.2 Risk Adjusted Discount Rates 40
2.6.3 Discounting in an Intergenerational Context 41
Guide to Literature 46
Food for Thought 47

3 Externalities and Nonmarket Valuation 49
3.1 Cost Function Approach 50
3.2 Expenditure Function 52
3.2.1 Hedonic Pricing 52
3.2.2 Recreation Demand and the Travel Cost Method 53
3.3 Contingent Methods or Direct Approaches 53
3.3.1 Contingent Valuation Method 54
3.3.2 Choice Experiments/Stated Preferences 57
3.3.3 Constructed Preferences/Stakeholder Method 58
3.3.4 Fuzzy and ad hoc Methods for Determining Nonmarket Values 59
3.4 Benefit Transfer 59
3.5 Concluding Discussion 61
Guide to Literature 63
Food for Thought 64

4 International Trade and Applied Welfare Analysis 66
4.1 Spatial Price Equilibrium Trade Modeling 66
4.2 Unrestricted Free Trade 69
4.3 Trade and the Measurement of Well-Being in Multiple Markets 71
4.3.1 Vertical Chains 71
4.3.2 Vertical and Horizontal Chains 72
4.4 Economic Policy and Trade: Examples 75
vi Contents
4.4.1 EU Import Restrictions on Canadian Durum Wheat 75
4.4.2 Incentivizing Antidumping and Countervailing Duty Complaints: Byrd Amendment 77
4.4.3 Restricting Log Exports 78
4.5 Concluding Discussion 81
Appendix 4.A: Mathematics of Supply Restrictions 82
Appendix 4.B: Calculation of Objective Function in SPE Models 83
Guide to Literature 83
Food for Thought 84
5 Governance, Rent-Seeking, Global Trade, and the Agreement on
Agriculture 88
5.1 Institutions and Governance 88
5.1.1 Models of Government 88
5.1.2 Takings 90
5.1.3 Institutions 92
5.1.4 Financing Government and Public Projects 94
5.2 Land Use and the Principal–Agent Problem 96
5.3 International Trade Negotiations and Agriculture 97
5.3.1 Agreement on Agriculture 98
5.3.2 Agreement on Subsidies and Countervailing Measures 103
5.4 Tariff Rate Quota 103
5.5 Concluding Discussion 104
Guide to Literature 105
Food for Thought 106
6 Analysis of Agricultural Policy: Theory 108
6.1 Background to Analysis of Agricultural Policy 109
6.2 Stock-Holding Buffer Fund Stabilization 111
6.3 Quotas and Supply-Restricting Marketing Boards 115
6.3.1 Quota and General Equilibrium Welfare Measurement 117
6.3.2 Quota Buyouts 118
6.3.3 Designing and Dismantling a Multi-Region Quota Program 120
6.4 Price Discrimination 123
6.5 Agricultural Technology: Genetically Modified Organisms 126
Contents vii
6.5.1 Agricultural Research and Development 126
6.5.2 Genetically Modified Organisms 127
6.6 Measuring Externalities in Agriculture 130
6.7 Concluding Discussion 137
Guide to Literature 137
Food for Thought 137
7 Agricultural Policies in the United States and Canada 140
7.1 Agricultural Support: A Brief Overview 141
7.2 US Agricultural Policy 144
7.2.1 Analysis of US Price Support Programs 147
7.2.2 Reducing Production and Disposing of Excess Grain 150
7.2.3 Decoupling 152
7.2.4 Moving Forward 154
7.3 Canadian Agricultural Policy 157
7.3.1 State Trading: The Canadian Wheat Board (1935–2012) 158
7.3.2 Crop Insurance 159
7.3.3 Western Grain Stabilization Act (1976) 160
7.3.4 Transportation Programs and Subsidies 161
7.3.5 Supply Management 162
7.4 Concluding Discussion 168
Guide to Literature 169
Food for Thought 169
8 Agricultural Policy in Europe and Asia 172
8.1 Agricultural Policy Reform in the European Union 173
8.1.1 Background to the European Union 174
8.1.2 High and Increasing Costs of Agricultural Programs 177
8.1.3 Integration of New Members 179
8.1.4 Reform of the CAP and Increasing Environmental Concerns 181
8.1.5 Further Analysis of Sector-Level Programs 185
8.1.6 Brexit 194
8.2 Agriculture in Developing Countries 196
8.2.1 Economy-wide Economic Reform and Chinese Agriculture 200
viii Contents
8.2.2 India and the Rice Economy 201
Guide to Literature 205
Food for Thought 206
9 Agricultural Business Risk Management 208
9.1 Privatizing Agricultural Hedges: Financial Products versus Insurance 210
9.1.1 Index Insurance and Derivatives 211
9.1.2 Futures Trading and Options 213
9.2 Agricultural Business Risk Management in the United States 216
9.2.1 Deep Loss Protection: The Federal Crop Insurance Program 216
9.2.2 Agricultural Business Risk Management Programs in the 2008 Farm Bill 219
9.2.3 Agricultural Business Risk Programs in the 2014 and 2018 Farm Bills 220
9.2.4 Dairy 225
9.2.5 Trade Issues 225
9.3 Agricultural Business Risk Management in Canada 226
9.3.1 The Shift from Price Support to Risk Management 226
9.3.2 Enter Growing Forward 228
9.3.3 Shift from Growing Forward to Growing Forward 2 230
9.3.4 Evaluation of Canada’s Agricultural Business Risk Programs 232
9.3.5 Going Forward: Canadian Agricultural Partnership 235
9.4 Concluding Discussion: Lessons for Agricultural Business Risk Management 236
9.4.1 Do Agricultural BRM Programs Distort Production? 237
9.4.2 Comparison of US and Canadian Approaches to Risk Management 238
Appendix 9.A: A Brief Look at the Economics of Risk and Risk Aversion 240
9.A.1 Systemic versus Idiosyncratic Risk 240
9.A.2 Expected Income Maximization and the Risk Aversion Coefficient 241
Guide to Literature 243
Food for Thought 244
10 Climate Change and Applied Welfare Economics 246
10.1 Anthropogenic Climate Change and Its Impact 248
10.1.1 Climate Sensitivity 248
10.1.2 Damages 250

Contents ix